SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1999
Commission File No. 000-16950
Prometheus Income Partners, a California Limited Partnership
(Exact name of registrant as specified in its charter)
California 77-0082138
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
350 Bridge Parkway
Redwood City, California 94065-1517
(Address of principal (zip code)
executive offices)
Registrant's telephone number, including area code: (650) 596-5300
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
PART I: FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
The accompanying unaudited financial statements should be read in
conjunction with the Form 10-K filed by the Partnership for the year
ended December 31, 1998. These statements have been prepared in
accordance with the instructions of the Securities and Exchange
Commission Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
The financial information does not include any adjustments for the
capitalization of any improvements which are done only in conjunction
with the year-end financial statements. While the financial information
is unaudited, in the opinion of the Partnership, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. The results of operations for the
three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(In Thousands, Except for Unit Data)
March 31, December 31,
1999 1998
(Unaudited) (Audited)
----------- ---------
ASSETS
Real Estate:
Land, buildings and improvements $ 29,938 $ 29,938
Accumulated depreciation (7,750) (7,610)
-------- --------
22,188 22,238
Cash and cash equivalents 1,069 1,183
Restricted cash 4,417 3,990
Deferred expenses, net 261 268
Accounts receivable and
other assets 72 61
-------- --------
Total assets $ 28,007 $ 27,830
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 26,406 $ 26,476
Payables and accrued liabilities 182 424
-------- --------
Total liabilities 26,588 26,900
-------- --------
General partner deficit (387) (392)
Limited partners' capital
18,995 limited partnership units
issued and outstanding 1,806 1,322
-------- --------
Total partners' capital 1,419 1,322
-------- --------
Total liabilities and
partners' capital $ 28,007 $ 27,830
======== ========
The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In Thousands, Except for Unit Data)
1999 1998
(Unaudited) (Unaudited)
----------- -----------
REVENUES
Rental $ 1,400 $ 1,385
Other income 43 41
Interest income 58 56
------- -------
Total revenues 1,501 1,482
------- -------
EXPENSES
Interest and amortization 391 393
Operating 300 272
Depreciation 140 137
Administrative 14 14
Payments to general partner and
affiliates:
Management fees 73 72
Operating and administrative 94 104
------- -------
Total expenses 1,012 992
------- -------
NET INCOME $ 489 $ 490
======= =======
Net income per $1,000
limited partnership unit $ 26 $ 26
======= =======
Number of limited partnership
units used in computation 18,995 18,995
======= =======
The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In Thousands)
1999 1998
(Unaudited) (Unaudited)
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 489 $ 490
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation 140 137
Amortization 7 7
(Increase) decrease in accounts
receivable and other assets ( 11) 17
Increase (decrease) in payables
and accrued liabilities (242) 42
------- -------
Net cash provided by
operating activities 383 693
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in restricted cash (427) (127)
Principal reductions on notes payable ( 70) ( 44)
Increase in deferred loan fees ( 0) ( 15)
------- -------
Net cash used for financing activities (497) (186)
------- -------
Net (decrease) increase in cash and (114) 507
cash equivalents
Cash and cash equivalents at
beginning of year 1,183 638
------- -------
Cash and cash equivalents at
end of period $ 1,069 $ 1,145
======= =======
The accompanying notes are an integral
part of these financial statements.
PROMETHEUS INCOME PARTNERS
a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS
1. THE PARTNERSHIP
Prometheus Income Partners, a California Limited Partnership (the
"Partnership"), was formed to construct, invest in, operate and
ultimately sell two multi-family apartment projects ("Properties"),
Alderwood Apartments ("Alderwood") and Timberleaf Apartments
("Timberleaf"), located in Santa Clara, California. The General Partner
is Prometheus Development Co., Inc., a California corporation.
The financial information does not include any adjustments for the
capitalization of any improvements which are done only in conjunction
with the year end financial statements. The financial information
included herein at March 31, 1999 and for the three months ended March
31, 1999 and 1998 is unaudited and, in the opinion of the Partnership,
reflects all adjustments (which include only normal recurring accruals)
necessary for a fair presentation of the financial position as of those
dates and the results of operations for those periods. Management fees
and payments to the General Partner and affiliates represent
compensation for services provided and certain expense requirements, at
cost, in accordance with the Partnership Agreement. The information in
the Balance Sheets at December 31, 1998 was derived from the
Partnership's audited annual report for 1998.
Partnership profits, losses and distributions are allocated among
the partners based on the provisions of the Partnership Agreement which
generally provide for allocations to begin when the partners are
admitted to the Partnership.
2. INCOME TAXES
In accordance with federal and California income tax regulations,
no income taxes are levied on the Partnership; rather, such taxes are
levied on the individual partners. Consequently, no provision or
liability for federal or California income tax has been reflected in the
accompanying financial statements.
3. HARDBOARD SIDING
The General Partner has learned that the type of hardboard siding
that was used at Alderwood and Timberleaf is failing to perform as
expected in a number of projects in various parts of the United States.
Two lawsuits have been filed, one for each Property. At this time,
experts on behalf of the Partnership have concluded the initial visual
inspection, the scientific testing of the siding material and
destructive investigation. The defendants have also completed their
destructive investigation. Additionally, certain structural issues were
uncovered at Timberleaf and were rebuilt as part of the
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. HARDBOARD SIDING, Continued
immediate repair process. The General Partner has subsequently
determined that additional immediate repairs are necessary, and is in
the process of beginning that work.
Both cases have been assigned to a Special Master who is duly
appointed and empowered by the court to assist in resolving the cases.
The investigation and other subsequent discoveries that will occur are
ordered by the Special Master on behalf of both plaintiffs and
defendants in an effort to come to a settlement. Destructive
investigation completed under the order of the Special Master has
produced a preliminary issues list which the Special Master will use in
attempting to prompt a settlement from the defendants. This information
is protected by the Special Master and is not for general distribution.
It is possible that a settlement can occur anytime under the
Special Master. It is not likely however that this will occur in either
of the cases, as one of the primary defendants has demonstrated very
little willingness to settle. In the absence of a settlement, the
Special Master will eventually order a trial date to be set and, if
necessary, the matter will be litigated in court. A trial date
assignment, if one were ordered would likely occur between 24 to 36
months from now depending on the court's schedule. Therefore, it is not
likely that the matter will be fully concluded within the next two to
three years.
Lastly, one defendant named in the Partnership's complaint filed a
cross complaint against the Partnership. The amount of damages being
sought is unspecified at this time. See Part II, Item 1 for further
discussion of this matter.
In addition to the security accounts mandated by the Partnership's
lender, the General Partner has determined that it is in the best interest
of the Partnership to continue building reserves for the potential cost of
dealing with the hardboard siding problems. At this time, the General
Partner cannot predict when distributions will resume due to the build up
of reserves; however, it is the General Partner's current intention to
resume distributions as soon as reasonably possible and prudent. The
reinstatement and level of future distributions will be dependent on
several factors, including the degree of damage caused by the hardboard
siding, determination of liability for potential costs and expenses of
dealing with the hardboard siding problem, and continued stabilized
operations at the Properties.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. REAL ESTATE
Statement of Financial Accounting Standards 121 ("SFAS 121"),
Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of, requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. In connection
with the hardboard siding matter, the General Partner reviewed the
projected cash flows of both Properties to ensure an adjustment of the
book value was not required in accordance with SFAS 121. Further,
although the full extent of the damage to the hardboard siding for the
Properties is unknown, management believes that the fair market value of
each Property still remains greater than their respective book values.
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction
Alderwood and Timberleaf, which are located in Santa Clara,
California, are apartment complexes with 234 units and 124 units,
respectively. The Properties commenced operations at completion of
construction in December 1986.
Liquidity and Capital Resources
Cash generated by operations during the first three months of 1999
was used to pay current operating expenses and debt service, including
payments to the hardboard siding security account.
Quarterly distributions have been suspended in order to accumulate
working capital reserves until the degree of damage to the hardboard
siding and determination of liability are known. See Note 3 to Financial
Statements, Hardboard Siding, for a more comprehensive discussion of
this matter.
Each Property has a non-recourse note payable, secured by a first
deed of trust. These notes bear fixed interest of 6.99% for Alderwood
and 7.09% for Timberleaf.
The terms of the notes require that each Property maintain a
hardboard siding security account. These security accounts are
additional collateral for the lender. Cash held in these security
accounts was $2,554,000 and $1,863,000 for Alderwood and Timberleaf,
respectively, as of March 31, 1999. Until the Completion Date, as
defined, an additional 10%, as defined, or monthly cash flow, whichever
is less, shall be deposited into each security account. Should the
hardboard siding repairs not be completed by December 2002, or every two
years thereafter, and insufficient cash has been accumulated to cure the
defects based upon the lender's determination of the cost, then all cash
flow shall be deposited into each applicable security account, as
necessary, to fully fund the cost of construction. If the projected cash
flow is insufficient to satisfy this deficiency contribution, then the
Partnership has 60 days to fund the shortage over the projected cash
flow. No withdrawals are permitted from the account except to cure the
siding defects. The lender shall have the right to hire its own
consultants to review, approve and inspect the construction. All such
reasonable fees and expenses incurred by the lender shall be paid by the
Partnership.
Should the litigation not be settled by December 2002, and the
Partnership has met all its obligations under the notes, then the
Completion Date, shall be extended 18 months from the earlier of the
pending settlement date or the last day for filing an appeal. Should
construction not be completed by the Completion Date due to an act of
force majeure, the Completion Date can be further extended to complete
the construction work.
Results of Operations
During the past year, Santa Clara County has experienced a
relatively flat growth in the creation of new jobs (.4%). The rental
market was also stable during the first quarter of 1999. The rental
supply and demand, despite new apartments coming into the market, also
remained stable. However, these new apartment projects may have an
effect on Management's ability to move rental rates upward as
competitive market conditions have required offering concessions to
maintain occupancy at all projects. In the first quarter of 1999, the
Properties marketed available units at rents that averaged $1,220 for
one bedroom units and $1,486 for two bedroom units. Average occupied
rent per unit for the quarter was $1,362 and average occupancy during
the quarter was 96% for Alderwood and 97% for Timberleaf. As of March
31, 1999, Alderwood was 95% occupied and Timberleaf was 97% occupied.
In the first quarter of 1998, the Properties marketed available
units at rents that average $1,258 for one bedroom units and $1,554 for
two bedroom units. Average occupied rent per unit for the quarter was
$1,324 and average occupancy during the quarter was 98% for Alderwood
and 97% for Timberleaf. As of March 31, 1998, Alderwood and Timberleaf
were both 97% occupied.
Excluding expenditures relating to quantification of the extent of
damage to the hardboard siding and associated litigation costs,
operating expenses increased 7%. The following first quarter operating
expenses increased between years: repairs and maintenance associated
with HVAC and lighting supplies/fixtures; marketing due to increased
advertising and resident activities; miscellaneous partnership due to
increase in legal expenses; and major repairs and maintenance
expenditures. These increases were offset by the decrease in costs
associated with utilities, insurance and other taxes, and corporate
housing expenditures. Corporate housing was discontinued in the second
quarter of 1997. Operating expenses, inclusive of hardboard siding
related costs, increased 4%.
Overall, net operating income remained comparable during the first three
months of 1999 when compared to the first three months of 1998.
Impact of the Year 2000 Compliance Costs on Operations
The Partnership's State of Readiness. The Partnership utilizes a number
of computer software programs and operating systems across its entire
organization, including applications used in financial business systems
and various administrative functions. To the extent that the
Partnership's software applications contains source code that is unable
to appropriately interpret the upcoming calendar year "2000" and beyond,
some level of modification or replacement of such applications will be
necessary. The Partnership currently believes that its "Year 2000"
issues are limited to information technology ("IT") systems (i.e.,
software programs and computer operating systems). The Partnership
currently believes there are no non-IT systems (i.e., embedded systems
such as devices used to control, monitor or assist the operation of
equipment and machinery), the failure of which would have a material
effect on the Partnership's operations.
The Partnership has completed its identification of IT systems that are
not yet Year 2000 compliant and has commenced modification or
replacement of such systems as necessary. The Partnership is currently
communicating with third parties with which it does significant
business, such as financial institutions and vendors to determine their
readiness for Year 2000 compliance. The Partnership has also completed
its assessment of the Year 2000 compliance issues presented by its
hardware components.
Cost of Addressing the Partnership's Year 2000 Issues. Given the
information known at this time about the Partnership's systems that are
non-compliant, coupled with the Partnership's ongoing, normal course-of-
business efforts to upgrade or replace critical systems, as necessary,
the Partnership does not expect Year 2000 compliance costs to have any
material adverse impact on the Partnership's liquidity or ongoing
results of operations. The costs of such assessment and remediation will
be reflected as general and administrative expenses.
Risks of the Partnership's Year 2000 Issues. In light of the
Partnership's assessment and remediation efforts to date, and the
planned, normal course-of business upgrades, the Partnership currently
has no knowledge of any critical business applications that will not be
compliant. No assurance can be given, however, that all of the
Partnership's systems will be Year 2000 compliant or that compliance
will not have a material adverse effect on the Partnership's future
liquidity or results of operations or ability to service debt.
The Partnership's Contingency Plans. The Partnership is currently
developing its contingency plan for all operations to address the most
reasonably likely worst case scenarios regarding Year 2000 compliance.
The Partnership expects such contingency plans to be completed by the
end of the year.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
Fisher Friedman, the project architects, have filed a cross
complaint against the Partnership. The cross complaint seeks a
determination of the proportionate share of responsibility of the
various defendants for the damage to the Properties arising from the
defective hardboard siding, but does not specify any basis for making
such an apportionment. The cross complaint further claims that if
negligence is found, that Fisher Friedman's be found to be secondary
(rather than primary) in nature, thereby obligating the primarily liable
defendants to indemnify Fisher Friedman for its liability. Again, the
cross complaint fails to state any basis for which the Partnership has
primary liability for the defective hardboarding siding.
Also see Note 3 to Financial Statements, Hardboard Siding, for a
more comprehensive discussion of this matter.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PROMETHEUS INCOME PARTNERS,
a California Limited Partnership
By: PROMETHEUS DEVELOPMENT CO., INC.,
a California corporation,
It's General Partner
Date: May 12, 1999 By:/s/Vicki R. Mullins
Vice President
Date: May 12, 1999 By:/s/John.J. Murphy
Vice President
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheets and the Statements of Income filed as part of the
annual report on Form 10-Q and is qualified in its entirety by reference
to such annual report on Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,486
<SECURITIES> 0
<RECEIVABLES> 72
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,558
<PP&E> 29,938
<DEPRECIATION> 7,750
<TOTAL-ASSETS> 28,007
<CURRENT-LIABILITIES> 182
<BONDS> 0
0
0
<COMMON> 1,419
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,007
<SALES> 1,400
<TOTAL-REVENUES> 1,501
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 629
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 383
<INCOME-PRETAX> 489
<INCOME-TAX> 0
<INCOME-CONTINUING> 489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 489
<EPS-PRIMARY> 26
<EPS-DILUTED> 0
</TABLE>
